By Richard Gill, CFA

Crypto miner Argo Blockchain (ARB) has announced that it mined 333.8 Bitcoin Equivalent (BTC) during March, down slightly from 337.5 in February. That took the total BTC mined for the year to date to 918, a record level and more than double the amount Argo mined in Q4 2019. Mining revenues for March however were £1.8 million, down from £2.5 million in February. That took Q1 2020 revenues to £6 million based on average currency rates for the period.

Despite having a higher mining capacity, the top line figures were affected in March as Bitcoin’s algorithmic difficulty increased early in the month and, like many other financial assets, Bitcoin saw a sharp fall in the month. Beginning March at c.$8,600, Bitcoin fell to a low of just below $5,000 before rallying to c.$6,500 by the month end. Mining margins for March were 42%, down from 50% in February, with Argo still considering that it continues to be among the most efficient crypto miners in the market.

In terms of expansion, Argo’s order of 1,000 Bitmain Antminer S17+ machines is said to remain on track for delivery and installation by the end of April. This will bring total BTC mining capacity to around 730 PH, an increase of approximately 10% from current levels. Argo recently completed an increase in its estate to 17,000 machines ahead of time and on budget, to create one of the world’s largest cryptomining mining companies. Finally, Argo added that its operations, located in North America, have not been impacted by Covid-19, with all staff working remotely and all mining facilities running as normal.

Assessment

While revenues for March were down by 28% compared to February, Argo put in a solid performance nonetheless, especially considering that the BTC price saw fell below $5,000 in March against highs of almost $10,500 in the previous month.

While reaching a three month high of 7.4p in mid-February shares in Argo have come back down with the rest of the market to currently trade at just 3.65p, giving a market cap of £10.7 million and a valuation that we cannot fathom on any count. To illustrate the value on offer here, the shares now trade at a discount of 52% to net assets of £22.4 million as at 30th June 2019. Of course and incrediby, that figure does not incorporate an additional nine months of profitable crypto mining operations, so the true discount is likely much deeper. We look forward to seeing the end December NAV figure when the 2019 results are released shortly.

Tweaking our model to take into account actual Q1 mining income vs forecasts and Argo now trades on a multiple of just 3.6 times our 2020 earnings forecasts. More pertinently however, the earnings multiple, and it seems crazy to relay this but it is true, in fact turns negative on an ex-liquid assets basis. We forecast cash + crypto to far exceed the current market cap by the 2020 year end. Investors should note that even at a margin of 42% (a relatively bad month) net mining profits for March can be implied at c.$0.75 million (£0.6 million). With our estimation of monthly admin expenses being c.£0.2 million this remains a highly cash generative and profitable business model (not considering non-cash depreciation).

As we enter the coming months we look forward to the upcoming halving of Bitcoin block rewards, an event which, as discussed previously, we expect Argo to benefit from. We believe that this halving will exclude most of the inefficient miners from the market (those with high power costs and older, less powerful hardware) which is currently estimated to represent over 50% of the total network hashrate. These miners turning off their mining operations, as they become unprofitable would be favourable for efficient miners like Argo as the difficulty rate would be expected to fall.

As per our 5 Picks for 2020 report our stance remains resolutely at Conviction Buy and we expect the company to look at addressing this valuation disjoint during H1 2020 through a dividend implementation.

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